Corp bond repo under review

Repurchase agreements (repos) in corporate bonds may have to wait for some more time as the Reserve Bank of India (RBI) wants to examine the legality of allowing clearing houses and depositories to use the real time gross settlement (RTGS) system.

The central bank is of the view that a committee should first study the matter.

Recently, the finance ministry asked the Securities and Exchange Board of India and the RBI to expedite steps towards developing India’s nascent corporate bond market.

The RTGS is a funds transfer mechanism where the transfer of money takes place from one bank to another on a ‘real time’ and ‘gross’ basis. This is the fastest way of transferring money through the banking channel as transactions are not subject to any waiting period and is different from the electronic fund transfer system that operates on a deferred net settlement basis.

The RH Patil committee on developing the Indian bond market had recommended allowing repos in corporate bonds. At the moment, repos are limited to government securities.

The use of RTGS for corporate bonds would enable faster and safer settlement. It would also improve market liquidity as illiquid bonds can be used as collateral to borrow at market-determined rates.

The RTGS connectivity will also improve the settlement of debt transactions on the stock exchanges. The government hopes to bring the corporate debt market to the stock exchanges and not let it continue as an over-the-counter market.

In October 2007, the Reserve Bank had announced that it would permit market repos after a new delivery and payment system was put in place to settle funds and securities on a net basis. Once the RBI approves RTGS connectivity for depositories and clearing houses, entities such as the Bombay Stock Exchnage and the National Stock Exchange would implement the new delivery system.

According to Prime Database, Indian companies raised Rs 1,15,266 crore thorough private placement of corporate bonds in 2007-08, a 23 per cent increase over Rs 93,855 crore mobilised in the previous year. However, there was hardly any public issue.

The finance ministry is also pressing the state governments to substantially reduce the stamp duty on corporate bonds to make them attractive for the retail investors. The government has already exempted the exchange-traded bonds from the ambit of tax deducted at source.